Department Of Transportation Proposes New Rules For When Airlines Must Provide Refunds To Passengers

The Department of Transportation has published a Notice of Proposed Rulemaking that would codify circumstances in which a passenger is entitled to a refund for their ticket, and rules for a future pandemic making passengers entitled to a voucher if it’s inadvisable for them to travel for public health reasons. DOT even wants to pre-write customer refunds into future pandemic bailouts of the airlines.

Mostly the rule would formalize current practice, after several airlines broke with convention during the pandemic and held their customers’ money hostage. There is much to like here, as a result of bad actors among the airlines and how tilted the law is in favor of air carriers. But there’s also some overreach as well.

Requiring A Refund When A Flight Is Cancelled

It is already a Department of Transportation rule that airlines must provide a refund when a flight is cancelled for any reason. It’s also a basic principle of contract law that if a merchant doesn’t deliver the service that’s been promised, they do not get to keep the money. Nonetheless,

  • Under the Airline Deregulation Act the Department of Transportation sets rules that replace much of common law. Outside of these rules, an airline’s contract of carriage often controls what a consumer is entitled to.

  • Air Canada actually argued they were free to ignore the existing DOT policy on refunds saying it was merely guidance rather than a formal published rule. DOT and Air Canada ultimately settled, so this wasn’t litigated, but DOT very much begged to differ.

Air Canada actually argued it was entitled to keep customer money even if not delivering promised transportation for tickets sold as non-refundable. They didn’t have to fulfill their end of the bargain, even though consumers with stuck with their end (paying).

During the pandemic United flouted DOT rules on refunds as well though eventually caved to DOT pressure. The United position seemed to be that ‘at this point in the pandemic we don’t know if there will be a United Airlines to issue fines to, we’re more concerned with ensuring we get to the point where we can talk about fines for stealing customer money’. JetBlue took a path similar to United. (In contrast, both American and Delta were generally better here, and this shouldn’t be forgotten.)

United came up with a truly creative definition of cancelled suggesting that if a flight no longer operated even on the same day the passenger had booked, but United still flies the route, then they haven’t actually cancelled the flight. The passenger has merely been rescheduled. If United used to fly a route 8 times a day, and cut that down to 3, they did not actually cancel 5 flights!

So the Department of Transportation would make clear that the current rule is really the rule, as well as what a significant change or cancellation actually is. Flight cancellations would be codified as entitling customers to refunds, through a formal rulemaking and not just advance warning that the Department appropriately considers taking money and then not delivering travel to be an unfair and deceptive practice.

Requiring Refunds For Significant Schedule Change

Consumers have long been entitled to refunds when an airline significantly changes its schedule but how much of a schedule change was enough to trigger this right hasn’t been clear. Some airlines treated an hour as enough, others said it was two hours, and then during the pandemic airlines played around with much longer periods of time.

The Department of Transportation would say that a change of 3 hours or more for a domestic fight or six hours or more for an international flight is significant. It seems to me that this is too long, that it may encourage airlines to be actually less generous, and that a three hour change is too long – a customer buying a 9 a.m. flight wouldn’t be able to take a refund and book new travel on another airline if their flight got changed to 11:59 a.m. even though it might mean missing their meeting.

The DOT also says that changes to the departure or arrival airport, or increasing the number of connections in the itinerary, constitutes a significant schedule change. This mirrors current practice, but codifies it in formal regulation rather than leaving open the question of whether DOT explanation of what it views as an unfair or deceptive practice carries sufficient weight on which to act.

Requiring Refunds For An Aircraft Change

Here’s what’s really new. Airlines don’t just sell a flight schedule, they sell an actual product. They promote their international widebody aircraft which usually still have seat back entertainment in coach, and often feature lie flat seats in business class. Customers go out of their way to buy tickets on flights sold as operated by these planes. But then airlines go and put a different plane on the route, giving passengers a completely different experience.

American Airlines flies their ‘Airbus A321T’ aircraft between New York JFK and Los Angeles and San Francisco, and on certain other routes like New York JFK to Orange County. It has lie flat business class seats and a separate even more premium first class. Yet they’ve been known to occasionally sub-in a ‘regular’ Airbus A321 with domestic first class, obviously disappointing customers who paid a substantial premium. Delta has done similar things in the past.

The Department of Transportation’s proposed rule would say that change to aircraft type – to the extent it causes a significant downgrade in the passenger experience or on board amenities – would qualify customers to choose to cancel in favor of a refund. This makes sense, and it’s basically a dishonest practice for airlines to fall back on the claim that they are only selling transportation between two points when they’re investing heavily in the marketing of the specific passenger experience and charging a premium for that experience.

Refunds When Customers Don’t Fly Due To The Pandemic

The Department of Transportation is proposing increased flexibility for passengers when travel is impossible or even merely inadvisable due to a pandemic.

  • If a passenger can’t travel due to a travel ban, a border closure, or government advice not to travel to protect their health or the health of those around them, they’d be entitled to non-expiring flight credits or vouchers.

  • And if the airline receives a pandemic bailout (you know they’ll be asking for government funds again) then the airline would have to provide refunds instead of credits.

Fares that have no change fees already allow for full credit, but those credits would no longer be able to expire (a move that Southwest just made anyway). Not all tickets are changeable in this way, however. And the risk and cost falls on the airline completely, under this rule, rather than the passenger.

At the start of Covid plenty of flights were being cancelled, and if a customer’s flight was cancelled they were entitled to a refund. But if the flight operated, odds on passengers wouldn’t have flown anyway, and they’d have only gotten a voucher – which at most airlines would ultimately expire.

I’m not sure shifting the risk of a pandemic fully onto the airline makes sense here, though to the extent airline bailouts have become inevitable (Delta’s CEO says moral hazard has been created: government will be there for airlines when needed) what DOT is really doing here is pre-attaching a condition to any future bailout that includes refunds Congress has been unwilling to write into law.

It is unclear how saying a bailed out airline has different customer obligations to customers in a pandemic, based on the agency’s statutory authority, that one that hasn’t been bailed out – when Congress doesn’t add that obligation as part of legislation providing for the bailout. That seems like quite a stretch.

Oddly under this part of the rule, airlines and ticket agents could impose a processing fee on the issuance of a refund or credit and the amount of that fee isn’t specified (as long as the fee is specified in advance0 so it may not wind up costing the airlines much of anything at all in the end.

Why Can’t Customers Just Sue

The airline industry got its own regulator in the Department of Transportation with deregulation. They aren’t merely subject to Federal Trade Commission rules. At the same time airlines are largely exempted from state regulation in how they run their business, so that there’s one unified set of rules for interstate air travel in the United States. The Supreme Court has found that state common law contract claims against airlines amount to state regulation and are thus pre-empted. So we are mostly left with an airline’s contract of carriage defining its relationship to the consumer, and violations of that contract as a cause of action – plus whatever rules the Department of Transportation puts in place.

In many ways this is problematic. The DOT ignores certain areas of abuse, and consumers have a hard time availing themselves of the courts. But DOT often gets things wrong, too, and can overregulate in some areas.

So we’re left with a vacuum to fill, and a DOT that both wants to fulfill its obligation to provide for safe and efficient air transportation, as well as to have lasting impact on the industry beyond its statutory authority. Both things seem at play here to a certain extent.

Will These Be The New Rules?

What’s in the Notice of Proposed Rulemaking is not what the Department of Transportation will do. It’s a proposal, and they’ll have to listen to and respond to public comments filed on the issues raised. Moreover not every proposed rulemaking is enacted. Some are closed without action. We’ll see where this goes.

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